Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How Trump Border Adjustment Will Affect Your Wallet

Personal_Finance / Money Saving Feb 15, 2017 - 04:37 PM GMT

By: Rodney_Johnson

Personal_Finance Economic theories don’t get much play at cocktail parties, and there’s a good reason.

They’re boring.

Who wants to talk about the Phillips Curve, the Taylor Rule, or Triffin Dilemma? They might have cool names, but once you dive into the details, the emotion goes flatter than a day-old beer.


But we should pay more attention, because these theories, and the economic policies built on them or against them, directly affect our lives… or more specifically, our wallets.

The economic topic at the top of the list today is the so-called “border adjustment,” or corporate tax reform, proposed by the GOP, which President Trump is slowly adopting.

To hear the proponents tell the story, the new financial arrangement should promote exports and discourage imports (and U.S. companies’ offshore operations), but not affect consumers one bit.

If you’re skeptical of this, then score one for your B.S. meter.

We will pay dearly for any such scheme. The question is, do you want to?

The border tax adjustment calls for exempting exports from corporate tax, while not allowing companies to deduct taxes on imports.

If Caterpillar sells a $100,000 tractor to a client in India, then the company can subtract that $100,000 from its taxed revenue. This will save Caterpillar $20,000 under the new, proposed lower corporate tax rate of 20%, down from the current 35%.

However, if General Motors imports a $20,000 Impala from Mexico, which it then sells for $24,000, the company can’t expense the $20,000 cost of the import. The government will tax General Motors on the full $24,000, not just the $4,000 of profit. At the new tax level, General Motors will pay $4,000 more in tax than it did before.

It’s hard to see how GM will make a profit by selling a $24,000 car that costs $20,000 to import and paying $4,800 in taxes, which is 20% of the sell price. Of course, they won’t. The company would have to either pay less for the import, or charge more for the car.

This is where you and I, or at least our wallets, come into play.

The theory of a border tax adjustment – most often used by European countries – calls for exporters (Caterpillar) to lower the price of their goods because they no longer have to pay taxes and can therefore be more competitive in the global market. This is supposed to cause a general scramble for dollars around the world, driving up the valuation of the dollar.

As the greenback appreciates, importers like GM can pay less for their goods from overseas, allowing them to maintain their current prices and still make a profit.

Right.

I’ve got a few observations… and a question.

Just because Caterpillar can keep more of its revenue, because it no longer pays taxes on exports, doesn’t mean the company is obligated to lower prices.

In fact, any corporate executive that simply tries to maintain equilibrium (pricing and sales) instead of improving the company’s bottom line should be fired immediately. Of course Cat will hold prices firm internationally as best it can, because the company wants to boost profits!

As for foreign buyers clamoring for dollars, well if Cat doesn’t lower prices, then this all goes out the window. But even if Cat did lower prices, and foreign consumers did buy more of our stuff overall, it doesn’t mean the dollar has to appreciate by the same amount.

There are the not-so-small matters of central bank policy both here and abroad, economic growth disparities, geopolitical developments, like the ones Harry has talked about recently, and a host of other things that affect exchange rates.

And why in the world would any company selling to the U.S. lower its prices just because the dollar strengthened?

This is exactly what foreign exporters want, because it boosts their profits back home! If they lowered their prices every time their home currency dropped, it would offset the benefits of holding down their currency.

Suggesting that exporters, importers, and the currency markets would behave like this makes no sense.

It ignores everything we’ve experienced over the past nine years.

And then there’s the little matter of why we would do this in the first place? If the exchange rate will adjust to offset any price difference the consumer might have paid, then presumably corporate actors (Caterpillar and GM, in our example) would be indifferent as well. Why go to the trouble?

Because the offset won’t happen, there will be economic winners and losers, and there will be pain.

The dollar won’t adjust as the pundits predict. Exporters will hold onto profits instead of lowering prices. Importers will raise prices to offset their increased costs. The end result will be a tax policy that favors exporters at the expense of importers, paid for by U.S. consumers.

The point of the policy will be to promote companies that create goods and services here, and to punish those that source those things from other countries. Which leaves me with one final question. How much are you willing to pay for this?

Consider everything you buy, from gasoline (imported oil), to furniture, to towels, and plastic utensils.

Most of it is made overseas.

And a good portion of domestic goods, like cars, contains a lot of foreign parts. If GM produces a car in the U.S., but uses 50% imported parts, then half of the car’s value can’t be expensed. This is just one more dimension of a multi-faced problem.

The short answer is, with a border tax adjustment, all of it will cost more.

Without an offsetting bump in income, rising prices lead to a lower standard of living, hitting consumers, like you and I, right in the wallet.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2017 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules